Best and Worst Utility Stocks for the Rest of 2013

Rudy Martin

At one time or another, you’ve probably held well-known stocks like Apple, Amazon, Netflix and other "exciting" trader favorites … names that rocket higher on great news, plummet on the slightest hint of problems and soar again simply because the broader markets happen to have a good day.

Yet, some of the best stocks that can pay you handsomely in the near- to intermediate term can very well be in sectors that are staples in your IRA, 401(k) or other long-term account — industries you might not typically associate with quick profits.

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But I do suggest looking at some industries that may appear to be stalwarts. That’s because you’ll find many up-and-comers that have the potential to be tomorrow’s long-term holdings.

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Today’s Trades,

Tomorrow’s Investments?

As world citizens become more affluent, they demand the infrastructure and technologies that it’s taken the developed world decades or even centuries to develop.

Just as much as they love eating better food, wearing designer brands and buying all the latest technology, they also crave reliable access to these items.

That means being able to cook the food, heat/cool their homes and power their gadgets at their convenience.

Despite the growing demand for utilities across the globe, however, world energy prices have been drifting lower. And central banks across the globe, for the time being, appear committed to keeping interest rates reasonably low.

These two trends combine to create one powerful opportunity for both consumers and investors.

That’s because lower costs for the energy-intensive and debt-leveraged business of creating and delivering electricity makes for stronger companies.

In many cases, better companies — than can serve even-more consumers — mean more-highly charged stock prices!

However, not all utilities are created equal …

An increasing number of people around the globe have access to — and many customers might even say “captivity by” — a regional utility provider to power their homes, appliances and gadgets.

Often, these providers are the only game in town. But take heart — even if you don’t have a choice in who your provider is, you certainly have choices when it comes to which ones are better to invest in.

And so today, I’d like to share with you …

3 Utility Stocks You Can Put to Work

My proprietary stock-investing model likes the global utility sector right now. That doesn’t automatically mean all stocks in this sector are buys; in fact, some rank downright at the bottom of the barrel, and I’ll give you a few of those names in just a moment.

But when it comes to utilities with upside, I’ve got my eye on three stocks, spanning three continents, that can provide some portfolio stability in the short term and some nice returns over a longer time period.

Each yields 2% or more in dividend yields, beating the 1.7% annual yield to maturity on 10-year U.S. Treasuries.

  • Chile-based Enersis SA (ENI) serves a conservative, stable nation that is likely poised to benefit from new land-based and offshore energy finds in this country. Look for steady gains in revenue and earnings to boost ENI’s dividends.
  • National Grid PLC (NGG) is the sort of steady and stable electricity provider an investor might expect from Great Britain. Priced at 12 times earnings, the firm enjoys a strong franchise and investors should take confidence in its dividend yield north of 5%.
  • In the Midwestern heartland of the United States, Wisconsin Energy Corp. (WEC) serves more than 1.1 million electric customers in Wisconsin and Michigan’s Upper Peninsula, in addition to 460,000 natural gas customers in Wisconsin. The firm also designs, builds and owns electric-generating plants.

So, which is the best one of the bunch? Let’s explore a little further and do some comparison-shopping.

ENI and WEC’s current dividend yields slightly lag the current 3.1% yields to maturity on U.S. investment-grade corporate bonds. On the plus side, however, their share values and dividend payments should appreciate in coming years if their stock prices advance in line with analysts’ estimates for profit growth.

The consensus is for five-year earnings growth at WEC to march ahead at a compound annual rate of 4%. Meanwhile, profits at ENI and NGG are expected to advance at an annual 4.2% pace over the next half-decade.

But not all electric utilities offer the prospects of predictable futures and steady investment returns. The chart below shows you how the best stack up against the rest …

3 Global Utility Stocks With Upside,

and 3 to Avoid (For Now)

(Click here to view full-size image)

Source: Morningstar

Avoid These 3 Not-So-‘Powerful’ Global Players

  • Independent wholesale power producer Calpine Corp. (CPN) owns and operates primarily natural-gas-fired and geothermal power plants in North America. It operates in wholesale power markets in California, Texas and the U.S. Mid-Atlantic. But at more than 50 times net, its price-to-earnings multiple would be pricey for a leading-edge developer of electronic devices, let alone for a generator of the juice that runs them.
  • As indicated by its name, savings from lower prices of hydrocarbon fuels isn’t likely to help China Hydroelectric Corp. (CPN). Even its location in a dynamic nation that has become the default manufacturer for the world fails to be a plus here. CPN has a huge way to go before it gets into the big leagues of the capital-intensive utility industry.
  • A compelling argument also exists for avoiding Empresa Distribuidora y Comercializadora Norte (EDN), even though it has recently been changing hands at a discount of 40% from its book value. The utility’s country of domicile, Argentina, has been suffering a cash crunch of foreign exchange. The last thing Argentina’s government would appreciate right now is having a resident corporation sending dividend checks to foreigners holding shares in the NYSE-traded utility.

Bottom line: The very least an investor should expect from an electric utility stock is a dividend yield. These last three stocks are devoid of any current dividends.

Of course, whether or not a stock offers a dividend should not make or break whether it’s a good investment to make. But when the stock isn’t anything to get excited about — now or down the road — and it doesn’t even pay you to wait, your decision is simple.

Potential stock appreciation and/or yield is attractive on its own. But combined, they are an investing force to be reckoned with. And if you can’t find either, then short the stock or run as far away from it as you can!

Happy Trading!

Rudy

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